What is the approximate expected percentage change in the value of each of these

Question

What is the approximate expected percentage change in the value of each of these currencies against the dollar over the next year when applying PPP to the inflation level of each of these currencies versus the dollar?

Australian AUD http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia

British GBP http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk

Japanese JGBhttp://www.bloomberg.com/markets/rates-bonds/government-bonds/japan

Data are in the links provided Thank you!!!

Explanation / Answer

PPP Or Purchasing power parity relates the change in two countries' expected inflation rates to the change in their exchange rates. Inflation reduces the real purchasing power of a nation's currency. If a country has an annual inflation rate of 10%, that country's currency will be able to purchase 10% less real goods at the end of one year.

Expected exchange rate can be derived by following formula -

S1 / S0 = (1 + Iy) ÷ (1 + Ix)

where

S0 is the spot exchange rate at the beginning of the time period

S1 is the spot exchange rate at the end of the time period.

Iy is the expected annualized inflation rate for country y in specific time period (foreign country)

Ix is the expected annualized inflation rate for country y specific time period (domestic country)

We can first calculate the expected exchange rate and then the change in exchange rate.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.